Understanding the Stock Market

Understanding the Stock Market

Article excerpt

So you've done your research, found yourself a good stockbroker and purchased your first stock. (Money Talks, August 1997)

Now, how do you follow your investment?

As a stockholder, you usually are allowed to sell your stock whenever you like. Stock prices change based on general business conditions and the earning and future prospects of a company Unforeseen circumstances may diminish the earning power of a company and thus lower the price investors are willing to pay for its stock. Prosperous times or improved management may increase the value of a stock. Before a company can sell stocks, it must first prove to the Stock Exchange that it possesses enough money, is a lawful enterprise, and that it is in good financial condition.

If a stockholder owns stock in a company that makes a profit, the corporation heads may divide the profit among the stockholders as dividends, or they may decide to use it to expand the business. Dividends may be paid only out of the corporation's profits. When profits are used to expand the business, the company may decide to issue more stock -- called a stock dividend -- to show that the stockholder has more money invested in the business.

There are also what are known as unlisted stocks, which are bought and sold in "over the counter" trading, usually by computer. This electronic market service is known as the National Association of Securities Dealers Automated Quotations system (NASDAQ).

It all sounds complicated?

Well, Deborah Frazier, assistant vice president and senior financial advisor for Merrill Lynch in New York, says knowing the terms of investment is good, but you don't have to be an expert. "Any investor should understand what investments he or she owns, and he or she should periodically check it to see how it is performing," she says. …